ProInsure - Business Insurance, Estate and Succession Planning
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Buyers are more comfortable when the sellers have insured themselves properly. It shows the buyer that they are serious about selling the business.
There are many unforeseen events that can put a business sale at risk. Some are easier to manage than others. Key man insurance is a relatively easy and inexpensive way to take risk off the table.
Key man insurance is simply life insurance on the key person in a business. In a small business, this is usually the owner, the founders or perhaps a key employee or two. These are the people who are crucial to a business; the ones whose absence would sink the company. These are the people the buyer wants to see insured.
Key man life insurance protects the buyer of a company during the transition phase where the seller stays with the company to consult and transfer good will.
Here's how key man insurance works: A company purchases a life insurance policy on the key employee, pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payoff. The purpose of key man insurance is to help the company survive the blow of losing the person who makes the business work. The company can use the insurance proceeds for expenses until it can find a replacement person, or, if necessary, pay off debts, fund purchase agreements and distribute money to investors. In a tragic situation, key man insurance gives the buyer some flexibility. The key man life insurance protection also protects the seller’s family and beneficiaries should the seller die in the middle of the deal.
How much key man insurance do you need? That depends on the business, but in general buyers like to see a replacement of two to four year’s wages. Term life insurance is an affordable solution.
If you are planning to sell your business make sure your liabilities are properly funded. Business Term Life insurance is one of the most cost-effective ways to fund the buy-sell portion of your shareholders agreement and to protect yourself and your key people when your business is for sale.
The proper use of business key man insurance makes your business more attractive to potential buyers and separates it from the competition.